The Busan principles and blended finance: time to bridge the divide

When the 2011 Busan Partnership agreement defined development effectiveness principles (country ownership, transparency and accountability, a focus on results, and inclusive partnerships), an important paragraph hinted that Busan went beyond traditional forms of development cooperation.

“Our partnership is founded on a common set of principles that underpin all forms of development co-operation. At the same time, we recognise that the ways in which these principles are applied differ … among the different types of public and private stakeholders involved.” [para 8]

In fact, a number of non-governmental actors have signed up to support the Busan agreement, reflecting the shift from the ‘aid effectiveness’ agenda to the ‘development effectiveness’ agenda. This list of ‘adherents’ even includes a number of institutions (such as the European Investment Bank) that are currently partners for donors, delivering blended finance. Blended finance, meaning using public inputs (often money, sometimes technical support) to attract or mobilise private investments through various different setups, has been on the rise; proposed by key donors as a way of turning ‘billions to trillions’.

Of course, in practice, the Busan principles (and corresponding indicator framework) have mainly been used to assess traditional development cooperation partnerships, involving official development assistance (ODA). Reviews of the development effectiveness of blended finance by some experts and stakeholders, particularly civil society, have been less than positive, highlighting challenges that key implementing actors like development finance institutions (DFIs) have in complying with the principles – mostly around country ownership, transparency and the difficulties of delivering, or measuring, developmental outcomes. This usually leads to the conclusion that blended finance is not an effective form of development cooperation, since DFIs can’t or won’t comply fully with the indicators of effectiveness as they currently stand (and especially, arguing that it’s not a good use of ODA). And yet, because there’s so little concrete evidence, it’s difficult to make a sound argument for or against its effectiveness as a development cooperation tool, beyond understanding that it doesn’t behave like budget support ODA – which is quite clear already.

The trouble with stopping here is that blended finance is still being used by donors, and in fact, is being scaled up. The tools we have for understanding blended finance don’t quite fit; so we can’t easily gather evidence on whether it works or not. Without this, we have a conversation driven by institutional perspectives, ideologies and political priorities. Getting a framework that fits can help inform the political debate with evidence – and promote mutual understanding about what effective blending looks like. It also empowers a wider range of stakeholders to participate in the conversation, a principle at the heart of effective development cooperation.

What we learned about blended finance and development effectiveness

For our latest discussion paper, DI reviewed all the available evidence – policies and practices of blended finance used by blended finance actors – and looked at how well the Busan principles are currently reflected. Using what we learned about these new forms of cooperation, we then tried to adapt the indicators to reflect the essential rationale of the Busan principles in the ‘blended finance’ context. At the end of the paper, we present a sample framework of new indicators of ‘effectiveness’ in blended finance. A warning to readers: the available evidence on blending is patchy, and our conclusions are not the last word. However, here are three key takeaways.

Country ownership looks different in blended finance, but it is still important.

Country ownership could seem to be simply incompatible with blended finance – but we need to see past this to motivate and incentivise actors to behave differently. In fact, there are good practice examples of blending aligned with country priorities and plenty that could reasonably be done to improve its alignment. The following indicators of effectiveness for blending may be useful:

ensuring compliance of blended finance with national legal and regulatory frameworks for doing business (with the assumption they are linked to national planning priorities)

enhancing the role and accountability of local authorities in country results frameworks (as they mainly interact with DFIs doing deals)

strategically aligning blended finance investments with national priorities of the country.

It’s also important to consider strong country-owned industrial policies that are shared with partners, and think about inclusion of DFIs in national or regional public–private dialogue.

Public–private partners in blending have more common ground for discussion under ‘Results’ and ‘Transparency’ than under ‘Country ownership’ and ‘Inclusive partnerships’.

Since all actors involved in blending that we looked at think that the two measures of effectiveness ‘Results’ and ‘Transparency’ are critically important (though they implement them differently), these may be easier places to start dialogue and promote mutual understanding.

Making blended finance ‘effective’ means helping different stakeholders to understand each other’s language, perspectives and priorities.

Blending is so new that the conversation is just getting started. One big challenge is that stakeholders in the public and private sector (for example, a donor and their bilateral DFI) don’t always understand each other well, and often have different visions of what ‘effectiveness’ means on the ground. (In the paper, we give an example of how a deal involving a DFI is generated in country, which can help illustrate the different actors that are involved from traditional development cooperation.) This makes it extra challenging for any partner country to try and shift the priorities of this array of new partners around to their nationally agreed priorities, and to be heard in dialogue. Generating evidence and mutual understanding about effectiveness between all stakeholders is important, as is reaching a better understanding of each other’s language. We hope that our paper can play a role in driving the discussion forward.